FAO improves access to finance for farmers through innovative instruments

There are various estimates of the investment needed to feed the world by mid–XXI century, given the forecast growth in global population (the latest UN estimates suggest that by 2050 the planet will be populated by 9 billion persons, up from the current 7 billion), higher incomes, changing dietary patterns and the challenge of climate change. FAO’s figures suggest that an additional USD 83 billion will be required annually to close the gap between the average USD 142 billion from all sources that low– and middle income countries have invested each year over the last decade and what is needed by 2050. In other words, yearly investment in agriculture must increase by more than 50 percent.

New actors as well as old are engaging in new ways to meet this challenge. New development partnerships and alliances are being formed that share common objectives. Yet FAO still retains an unrivalled advantage, the legacy of the skills and knowledge it commands. These skills include, in particular, the special expertise of its Investment Centre Division which, since the early 1960s, has contributed to mobilizing well above USD 100 billion of targeted investment (of which two–thirds from external commitments), and currently about USD 4 billion per year.

The spectrum of activities carried out by the FAO Investment Centre at country and regional level through peer–to–peer partnerships with major international development financing institutions encompasses a number of thematic topics. One exciting area of intervention, which is relatively new, is FAO’s action to further introduction and adoption of innovative financing tools tailored to the needs of farmers and rural small– and medium–size enterprises (SMEs).

In the developing world, but also in middle–income countries, farmers and SMEs often face difficulties obtaining short–term financing from banks or input suppliers due to their inability to provide collateral. In 2009, the Ministry of Agricultural Policy and Food of Ukraine, one of the major global grain producers and exporters, estimated that farmers lacked about UAH 4 billion (EUR 500 million) required for fuel, fertilizer, seed purchases and other seasonal crop production needs.

Together with one of its main partners, the European Bank for Reconstruction and Development (EBRD), FAO has worked in a number of countries to foster adoption of innovative instruments that help farmers overcome this structural barrier.

One of these instruments is the Crop Receipt (CPR), a collateralization tool that represents an obligation to supply agricultural products or payment in return for a pre–harvest loan. CPRs are functioning well in Brazil and the FAO–EBRD partnership has undertaken to introduce them in transition countries, with initial focus on Ukraine, Serbia and the Russian Federation, where the demand for such financial products is established and governments have expressed interest. Thanks also to FAO’s assistance, Ukraine has adopted a specific law on CPRs and has requested further help in implementing it.

To briefly describe what exactly the role of FAO has been in these achievements, a few words of explanation are in order.

The CPR (from the Portuguese Cédula de Produto Rural – Certificate of Agricultural Product) uses a crop as collateral before even it is harvested. Essentially, the CPR is a bond issued by a producer whereby the latter promises to deliver agricultural products at a given time. Being subject to the promissory note rules, the creditor’s grounds for refusing to honour his obligations are limited. Notably, parties may agree on out–of–court enforcement, which guarantees rapid execution and avoids long, uncertain court proceedings. This instrument also allows farmers to access financing from the non–banking sector along the supply chain: agricultural inputs suppliers, trading companies and food processors that may be in a better position to assess farmer’s risks than the traditional banking sector.

So what FAO is doing in the framework of the partnership with EBRD is to provide assistance to the countries on four crucial aspects: First, facilitation of public–private dialogue which has proven critical to build trust and cooperation between the private sector and the government, and a prerequisite inter alia to the implementation of new financing instruments. In Ukraine — the world’s fifth largest gain exporter — thanks to the Working Group on the Ukrainian Grain Market, policy transparency and predictability have improved, in turn increasing investor confidence. A tangible result has been the discontinuation of past practices of imposing damaging export restrictions. Second: revision of the legal framework, to make sure that agricultural credit provisions are clear for farmers and reassuring for lenders. It means that if there is a default, lenders can quickly activate the guarantee. The FAO’s Development Law Branch takes a lead role in this area. Third, targeted communication, to ensure that all market participants (farmers, food processors, traders and bankers) are aware of the key characteristics of the new instrument and understand how it works. Fourth, capacity development of the various concerned national institutions (Ministries of Agriculture, agricultural and food industry associations, etc.).

FAO, working closely with its financing partners and country governments and stakeholders, is playing a decisive role in creating public goods — trust, legal and normative frameworks, information, and upgrading of capacities at all levels — that ultimately allow farmers in a number of countries to use their crops as pre– or post–harvest collateral. This, in turn, considerably improves their chances to access credit and therefore expand their businesses, hence growing more profitable and efficient. According to the Agrarian Markets Development Institute in Ukraine, the Ukrainian farmers are expected to receive EUR 200–300 million of additional financing in the first two years following the introduction of the crop receipts system.

Based on the success of CPRs in Brazil and the very encouraging ongoing initiatives in Ukraine, Serbia and the Russian Federation, further development and adoption of this instrument will benefit farmers who need access to credit before the harvest to finance their working capital, thus helping them significantly increase their resilience to price volatility and market shocks.